The Power of Perspectives

A small leap forward

After 18 years of negotiations, a new agreement between Canada and China finally promises better investment protection for nationals in both countries

Cliff Sosnow, Partner, Blakes, Ottawa

In Chinese foreign relations, the panda has long been a symbol of goodwill. So when Prime Minister Stephen Harper returned from his trip to the Middle Kingdom last February with a pair of pandas, there was a lot to be cheerful about.

No less significant were the announcement of 21 business deals and the conclusion of an economic agreement between Canada and China. Eighteen years of talks finally produced a foreign investment promotion and protection agreement (FIPA) that proponents hope will encourage investment between the two countries.

Canada already has similar agreements in place with 27 countries, including Russia, Poland, Argentina and Thailand. All aim to protect Canadian investors from risks they may encounter in foreign jurisdictions, from instability of political and legal institutions in the host country to expropriation of investments without adequate compensation. Generally FIPAs follow the same legal model and offer comparable levels of protection, but the final agreement will depend on the limits each party imposes.

“At one time, the Canadian business community felt that the Chinese legal system did not offer them adequate protection,” says Peter Harder, president of the Canada China Business Council and senior policy advisor in government policies at Fraser Milner Casgrain LLP in Ottawa. By 2011, however, Canadian direct investment to China increased by more than 24 per cent since 2008 to $4.5 billion. In that same period Chinese investment in Canada registered an increase of 92.5 per cent to over $11 billion.

And though one may expect that Chinese investors already have adequate protection in Canada, foreign investment carries risks in even the most developed economies. Harder recalls that under the North American Free Trade Agreement, the U.S. giant Abitibi Bowater successfully challenged New­foundland & Labrador’s expropriation of its facilities in 2008.

Foreign investors in Canada are not as well protected as we may think, especially considering lingering fears in this country about China’s growing appetite for energy and natural resources, and how that may affect Canada’s sovereignty and national security. Indeed, witness the mixed reactions to the $15-billion bid in July by Chinese state-owned CNOOC Ltd. for Canadian energy company Nexen Inc.

Both parties have yet to review the exact terms of the FIPA between Canada and China before signing and ratifying the agreement. But it’s expected to include national treatment and expropriation provisions similar to NAFTA’s Chapter 11 protections for foreign investors, as well as a dispute resolution mechanism between an investor and the state.

With regards to national treatment, the terms require that the host country grant the foreign investor equal treatment to investors from that or other countries. The terms on expropriation expand its concept to include any measure or policy that would restrict an investor to such an extent that it can no longer continue its operations. Cliff Sosnow, a partner at Blakes in Ottawa gives the example of a Canadian company in China that loses all of its investments when its licence is withdrawn, which can be considered a disguised form of expropriation. The FIPA between Canada and China can assure investors of both parties some protection against such risks, or at least guarantee them appropriate compensation.

In accordance with the FIPA’s mechanism for dispute resolution, a private investor can take legal action against the state and submit the dispute to arbitration. “Without the FIPA, any dispute between a Canadian in­vestor and the Chinese government would be settled ... before the Chinese courts,” posits Robert Wisner, a partner at McMillan’s office in Toronto. “It is understandable that there be doubts on the part of Canadian companies with regards to the fair and just course of the trial.”

Even so, Canadian investors may prefer to avoid arbitration, so as not to risk hurting long-term business relationships inside China. According to Sosnow, foreign in­vestors tend to avoid appearing overly aggressive when doing business in Asia. Disputes are best settled quietly.

As China has shown through its panda diplomacy, exerting one’s influence is often best achieved by making the right gesture.

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